Investing in Grain

Investing in Grain: Going with the Grain
A DailyReckoning Whitepaper Report
By Chris Mayer – The Daily Reckoning

I just recently read Marc Faber’s October letter. Faber, as you probably know, writes the Gloom, Boom & Doom Report. His contrarian financial views often appear in various media outlets.

His latest issue included an interesting little piece on grains. Mark McLornan, of Agro Terra Ltd., wrote it. The piece opens with a question that is right up my alley:

“Where in the world can you buy real assets that are cheap, uncorrelated to economic cycles, and independent of interest rates? What asset class can take advantage of the major cyclical forces of China/India development, global warming, and depleting water resources?”

Investing in Grain: Cheap, Tangible Assets

I spend a considerable amount of time thinking about where to find cheap tangible assets. More than just finding cheap assets, I also like to see that the investment somehow cashes in on some bigger trend or idea. In Capital & Crisis, my original letter, I’ve forged a good track record finding just these kinds of opportunities. And in the first few months of my new service, Mayer’s Special Situations, we’ve also added some nice investments loaded with tangible assets and wealth creating businesses.

McLornan, not to leave us hanging, gives us his own investment candidate: grains.

“The agricultural grains market has been totally uncorrelated to economic cycles for at least the past 50
years. The main factors driving grain prices are a combination of population growth, increases in standards of living, and production capacity.”

Investing in Grain: A Nutritious Choice

Of course, the reason this strikes a chord with me is that I also like the grains. In Capital & Crisis, we’ve held Agrium (NYSE: AGU) since January 2005. It’s nearly doubled over that time. In MSS, we’ve got Saskatchewan Wheat Pool (TSE: SWP). It’s a little below my entry price as I write, but a good story is unfolding there. Recently, the Pool made a bid for Agricore, in an attempt to become a major agricultural powerhouse.

Investing in Grain: Six Good Reasons Why

In bullet point form, here are some of the key points McLornan mentions:

  • Demand outstripping supply for the last six years, while inventory levels are also low. “Any shock to the demand or supply side,” McLornan writes “and this market is positioned to explode.”
  • Increasing prosperity in China and India leads to more and more people eating beef and chicken. In China, meat consumption is growing 20% per year, putting pressures on the grain markets to support growing livestock.
  • Demand for wheat is outstripping production in China and India. Production of wheat in China is actually falling.
  • The growing scarcity of water – particularly in China and India. We’ve covered this phenomenon pretty well in this publication. McLornan makes an interesting point here.The most efficient way for China and India to conserve water is to import grain, as it takes 1,000 tons of water to produce 1 ton of grain.
  • The U.S. would be the natural choice to make up that slack, but water is getting scarcer here too. McLornan writes about the once-vast Ogallala aquifer that underlies the Central Plains, “the world’s fastest disappearing aquifer.” Farmers are drilling deeper for water at increasing costs.
  • Biofuel demand. Here a picture is worth a thousand words. Take a look at this:

Do you think all that extra corn used for ethanol is going to impact the price of corn? I think so.  Net-net,
McLornan’s observations in the Gloom, Boom & Doom Report all add up to a bullish outlook for grains. That’s a good backdrop, too, when you think of Saskatchewan Wheat Pool.

Investing in Grain and the Saskatchewan Wheat Pool

The Pool announced an offer to buy Agricore, the other leading Canadian grain handler. “We are attempting to create a significant agri-business with decades of expertise, superior assets and a truly unique home grown Canadian advantage,” said Pool president and CEO, Mayo Schmidt. “By combining operations we will create the scale and scope of operations to enhance Western Canada’s
position in a global environment.”

I love the deal. Whether it will happen or not is another matter. Regulators will have to approve it and given Canada’s rather hostile turn on business lately, maybe we
shouldn’t count on that.

In any event, I like Pool’s thinking. With their rock-solid finances, Pool is in good shape to position itself as a global player in the coming boom in agricultural markets – in particular, the grains.

Saskatchewan Wheat Pool is a buy.

Related Articles on Investing in Grain:

Crop Circles by Eric J. Fry
“Agricultural commodities have been soaring for the last five weeks, despite horrible fundamentals. The Rude Awakening wanted to know why…so Eric Fry sought out an expert…”

Corn Pops by Eric J. Fry
“Despite a bumper crop and record inventories last year, corn prices have managed to rise. This action is an anomaly to some traders…but not to the Rude Awakening. We have an explanation…and it involves a banned substance!

Related Links on Investing in Grain:

Earth Policy Institute
Notes the increasing demand for grains and corns for use as alternative fuels: “The U.S. Department of Agriculture projects that world grain use will grow by 20 million tons in 2006.”
AgriMarket Information
Highlights Ukrainian company’s investment in oil as well as grain for alternative fuel.
Grains Newsletter
“‘Grain commodities are about the only commodities that react to fundamentals.  Grain commodities are especially adaptable to long term trading'”
Grain Growers Association
Gives you the down-low direct from the growers based in Australia, a leading exporter.
Crop Rotation in the Grain Belt
New York Times article online fleshes out changes in the industry for your reference.

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